Subsequent AAR Ruling Taking A Contradictory View Cannot Bind Taxpayer Nor Can It Displace Binding Effect Of AAR Ruling In Taxpayer’s Case: Bombay HC

While setting aside the reassessment notices issued for AYs 1997-98 to AY 2000-01 on the ground that the Assessee was wrongly given the benefits under the India-UAE DTAA, the Bombay High Court held that the Revenue Department exceeded his jurisdiction while proposing to re-open the assessment by relying upon subsequent AAR ruling in Cyril E. Pereira, contradicting the AAR ruling in Assessee’s case holding that Assessee was entitled to DTAA benefits.

The Division Bench of Bombay High Court comprising of Justice K.R. Shriram and Justice Firdosh P. Pooniwalla observed that the subsequent AAR ruling in Cyril E. Pereira taking a contradictory view cannot bind Assessee nor can it displace the binding effect of AAR ruling in Assessee’s case under Section 245S of Income Tax Act.

Senior Advocate P.J. Pardiwalla appeared for the Assessee while the Revenue was represented by Advocate Akhileshwar Sharma.

The brief facts of the case were that the Assessee, a deceased person, was a resident of UAE, had filed an application before AAR seeking clarity on the issue of taxability of his income earned in India, wherein it was held that capital gains on the realisation of the Indian movable assets shall not be taxable in India under Article 13(3), of the India-UAE DTAA. The Assessee, filed its return for AYs 1997-98 to AY 2000-01 by relying upon the said AAR ruling and did not offer the capital gains accrued to him to tax, but offered the dividend and interest income to tax @ 15% and 12.5%, respectively, as per the rates specified under DTAA. Subsequently, Assessee was served with reassessment notices under Section 148, for AYs 1997-98 to AY 2000-01; Revenue furnished the reasons to believe that income chargeable to tax has escaped assessment for the relevant AYs, on the ground that income has escaped assessment as the benefits of the DTAA were wrongly given to the Assessee. Aggrieved, the Petitioner, (Assessee’s husband) filed the present petition challenging legality and validity of notices issued under Section 148 on the ground that the same was issued without satisfying the jurisdiction condition necessary to make a re-assessment.

After considering the submission, the Bench observed that Section 245S mandated that a ruling would apply and be binding on both the Assessee and the Revenue in relation to the transaction for which it so sought, which was ignored by the Revenue while re-opening Assessee’s assessment relying on AAR ruling in Cyril E. Pereira.

The Bench relied upon a co-ordinate bench ruling in Prudential Assurance Co., wherein it was held that Section 245S provides that the AAR ruling binds the Applicant, Commissioner and the Income Tax Authorities subordinate to him and shall apply in relation to the transaction in which the ruling was sought thus, the ruling in a subsequent case wherein a contradicting view was taken by the AAR could not bind assessee, nor can it displace the binding effect of the ruling rendered in that assessee’s case.

The High Court observed that Section 245S(2) does not apply to the present case as it provides that the ruling shall be binding unless there is a change in law or facts based on which the advance ruling has been pronounced and since no change in law or facts took place in the present case or is mentioned so in the reasons to believe, provided by the Revenue, the subsequent ruling in Cyril E. Pereira, cannot be considered as a ruling that changes the law as it is not under Section 245S(2).

While observing that the Assessing Officer has manifestly exceeded his jurisdiction while proposing to re-open Petitioner’s assessment relying on the ruling of AAR in the case of Cyril E. Pereira, the High Court held that the subsequent AAR ruling in Cyril E. Pereira taking a contradictory view cannot bind Assessee nor can it displace the binding effect of AAR ruling in Assessee’s case.

Thus, the Bench observed that merely because the AAR in the case of another Applicant has taken a different view, cannot be a sufficient basis on which the Revenue could ever have any reason to believe that income chargeable to tax has escaped assessment.

Noting that the Revenue in the reasons to believe, merely sets out the relevant facts and sought directions from the Additional Director to re-open the assessment, which shows that the Revenue did not personally form the belief that income liable to tax has escaped assessment and has abdicated her jurisdiction, which renders the re-opening of assessment invalid, the Bench concluded that the notices under Section 148 are illegal.

Cause Title: Usha Eswar v. Rajeshwari Menon Income Tax Officer

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